Budget Thoughts

The Treasury has invited comments for the 2015 Budget.  I set out below some personal thoughts on a Budget for Small Business.  There are plenty of other ideas too – but please Chancellor make the rules clear and the policies consistent over time, so that business owners can plan for the future.  Tinker Not!

  1. Make the income tax rate on small traders/1890 Partnership Act partnerships limited to 20% on trading income.  [Do not include large 20+ member partnerships nor LLP’s.  Why should Mr Patel’s corner shop be subject to a 40% marginal rate charge on trading income above ~£40k when his rivals at Tesco, Asda, etc., only pay 20% maximum rate on £millions of profit?
  1. Abolish (or severely curtail) the connected parties rule for incentives such as EIS.  The current rules are complex and arbitrary and basically mean the only individuals able to claim the reliefs are those who know nothing about the business.  This encourages excess cost and mis-selling.  If a friend or family member were encouraged to invest via a tax incentive, I believe that would provide far more intelligent seed corn funds and encourage small business.
  1. Similarly, free up personal pension funds to invest in small business.  By all means encourage diversity, but do not think restricting investments to the ‘Trust me, I’m a Big City Institution’ circle is going to improve the UK economy swiftly.  At present people are prohibited from investing part of their pension fund in a growing, local small business that they believe in and trust, and instead have to hand it over to a faceless Fund Manager (where he generates neither emotion).  This cuts down on capital available to growing entrepreneurial businesses because all pension savings are focussed on large City Institutions.
  1. Split retail and investment banking, and in exchange for Government guarantees to the former, insist on x% of lending going to small business, decided at local level.
  1. Abolish rates and have a radical review of property taxes and local Government funding.  I do not know what the answer is, but the split state of the nation between London/South East and the rest, does not bode well for everyone.

I dare say preparing a National Budget is a complex affair, requiring detailed planning, financial modelling and intellectual thought.  I strongly approve of the idea of taking sounding from our profession who deal with the consequences of tax policy on a day to day basis.  However, it is a bit scary to think that anyone seriously expects radical policy ideas raised now are actually going to feature in a June 2015 Budget!  Perhaps next time?

Procedural Issues – Tax Case Law

Recent tax case law has brought out some interesting points on how the Courts view operational issues.

1. Tax avoidance schemes associated with the film industry seem to follow inevitably (with various complications) from the complex tax reliefs which are designed to promote film finance. It seems to lead to a slightly odd dichotomy where the Chancellor sets law to give relief on film investment and is then surprised and upset when schemes are set up to exploit the reliefs. In Samarkand the tax avoidance scheme failed, partly because the Courts found emails which included phrases such as ‘Don’t mention this, it smells of pre-ordained’. This reinforced HMRC’s case that the scheme was not a straightforward use of the relief, but an artificial tax avoidance scheme, with no real commercial substance. A good rule of thumb would be to train staff not to put anything on file which they would be embarrassed to read out in court.

2. An interesting one in terms of postal submissions is the recent case of O’Keeffe. The taxpayer claimed his wife had posted his Return some weeks before the deadline. HMRC said they had not received it until a month after the deadline. They succeeded with their imposition of a late filing penalty.

Whilst the First Tier Tribunal agreed that mail may go astray, which could be a reasonable excuse, there was no proof of postage in this case. It would be interesting to hear what evidence HMRC put forward in terms of date of receipt, as mail does seem to go astray more often than it used to and with the closure of so many Post Offices obtaining routine proof of postage would be difficult for many.

3. Final procedural point – and statement of the obvious – encourage clients to keep proper records. The lack of a clear trail of what was owing led to the taxpayer in Michiels losing a bad debt relief claim against profit, because on balance the outstanding sums related to a later period.

Trading Losses and Succession – Leekes Ltd v HMRC

A recent case on trading losses could have implications going forward as it was found that, in the specific circumstances, losses from an acquired trade could be used against profits from the existing trade.

The case in question, Leekes Ltd v HMRC (TC4298), was heard by the First-Tier Tribunal.

Leekes Ltd previously owned four department stores and purchased Coles, a company with three furniture stores as well as warehousing facilities.  Coles had been loss making for a number of years. The Coles trade was hived up to Leekes Ltd and the stores were all rebranded as Leekes stores; however the former Coles stores continue to sell furniture predominantly.

Leekes claimed the brought forward losses incurred by the Coles business against the profits of the combined business for the year to 31 March 2010, which was the first following the acquisition.

HMRC argued that the losses incurred in the Coles business could be used only against future profits from that business, and could not be used against the previous Leekes business.

It was common ground between the company and HMRC that Leekes Ltd succeeded to the trade of Coles Ltd and that the trade consisted of the running of out of town department stores.

The issue at stake was therefore whether Leekes could relieve trading losses incurred by Coles before the succession against the profits of the combined trade after the succession by virtue of the provisions of ICTA 1988, s. 343(3).  Interestingly, HMRC agreed that ICTA 1988, s. 343(8) did not apply in this case.  Section 343(8) deals with situations in which there has been a succession to something different than the trade of the successor company, but in that case specifically requires that losses are kept separate.

Section 343(3) stated that ‘the successor shall be entitled to relief under s. 393(1) as for a loss sustained by the successor in carrying on the trade, for any amount which the predecessor would have been entitled to relief had it continued to carry on the trade.’

The legislation did not make it clear whether it was necessary to stream the losses as it was not clear whether the “trade” referred to was the post or pre-acquisition trade.

The First-tier tribunal found in favour of the taxpayer company, concluding that the Colesʼ trade losses were relievable against future profits of the combined post-acquisition trade for three main reasons:

1. There was no explicit reference to a requirement to stream losses in s. 343(1) and (3), unlike those of s. 343(8) where there is such a specific.

2. That requiring the company to stream losses would involve extensive practical difficulties in application.

3. That such an approach to the legislation is more closely aligned to commercial reality.

This ruling may help to give greater clarity to taxpayers on the treatment of such losses.  As was admitted in the case, the legislation itself is fairly vague and therefore the decision should be useful. It is possible that HMRC may seek to appeal or look to rewrite the legislation to achieve HMRCʼs preferred interpretation.

It should also be noted that ICTA 1988, s. 343(3) is re-written at CTA 2010, s. 944 but the substance of the rules appears to be unchanged in the process.

The Fool on the Hill?

I note commentary in Taxation approving of ‘High Tech’ solutions. This would encompass (I gather) everyone signing up to the ‘Cloud’.

Technology is wonderful. BUT:

Some points. They are meant for debate, and I certainly do not believe in the extremes some of the ideas below may suggest (so no abuse to anyone, please, just healthy discussion).

1. Tax Authorities are obliged to deal with everyone (presuming they wish everyone to pay tax). This must include the elderly and the computer illiterate. The Victorians did not exempt those who could not read from tax. Try to be fair Government! It will get you far more benefits that you could imagine.

2. I did a Bio-Chemistry Degree and learned exciting things about genetics! Who would have thought (query designer babies?) that the recessive gene for sickle cell anaemia (bad) actually is in its more common form, beneficial in terms of resisting malaria?

3. Monocultures are dangerous in terms of ecosystems. I suspect they are also bad in terms of governance and economics? Perhaps not everything should be run through companies quoted on a stock exchange, nor every tax return run through the same memory system.

4. Having experienced the dire impact of a computer crash on a number of occasions, the point about monocultures is perhaps exemplified. In the ‘olden days’ (not that long ago) when a crash happened we just went back to those tasks we could do by hand. Now, we sit frustrated. When it happens, small business owners worry about economic loss; employees worry about whether they may get paid, and if so how soon they may legitimately disappear back home/to the pub/etc. PLC’s wish to send out questionnaires from the call centres, but cannot because the system has failed.

5. Unfortunately, evil exists in the world, and I fear a Government with a one track computer system may well find it has been hacked? At what level of loss does it go from being an embarrassment to be kept secret to an outright potential coup? A Government with no money will swiftly run out of a mandate to govern!

6. How many Government computer projects have developed totally smoothly, efficiently and on budget?

7. This is not to dismiss the Fool on the Hill, Head in a Cloud – It is just that the Man of a thousand voices is talking perfectly loud. (Thank you Lennon and McCartney). Those voices encompass the lonely who may not have computer access. Would Eleanor Rigby have had a laptop next to her face in a jar? How would she submit her tax returns?

8. As I think most people would agree Windows and Google are fantastic – when they work… Imagine a virus when they did not?

9. The recent debates suggest TAX = POLITICS. The LA Gangs got this right when saying a mugging was a ‘tax’. Why give money to someone you do not support? Do not give it to a gang. This is the reason you can vote and Government should look after all, not just their voters. It should mean a vote for someone who does not get in, is not ‘wasted’. It should be like an insurance premium. You do not wish the disaster risk you insure against to occur. Still pay it – it is better than the alternative!

10. HMRC should employ and train more technical Revenue Officers. There is no shortage of rules. My belief is HMRC are short of the resources to enforce them. From my experience losing enforcement ability is the easiest way to lose compliance enthusiasm from the general public.

Vote and then demand intelligence and flexibility from those who get it. [Not mere lobby fodder].

Views welcome. Share them also with the prospective MPs who intend to write your tax laws for the next 5 years.